July spectrum auction may realise mere Rs 70,000 crore, experts say

On Saturday, the TC, highest decision-making wing in the DoT, set starting price for sale of 4G airwaves in the coveted 700 MHz band at Rs 11,485 crore a unit.Kalyan Parbat | ET Bureau | May 02, 2016, 07:39 IST

KOLKATA: The steep base price set for sale of 700 MHz band (4G) spectrum in the upcoming auction will deter buyers and cap government sales proceeds at Rs 60,000-70,000 crore, or about a third of targeted revenue, experts said.

Some analysts and industry executives ET spoke with said such a scenario could compel the government to rethink pricing and go for a second auction.

On Saturday, the Telecom Commission (TC), highest decision-making wing in the department of telecommunication (DoT), set starting price for sale of 4G airwaves in the coveted 700 MHz band at Rs 11,485 crore a unit. At this price, a 5-MHz pan-India block would cost Rs 57,425 crore, more than half of the entire proceeds of the last spectrum auction.

“India faces the prospect of a failed sale as chances are that over 90% of 700 MHz airwaves, which constitute bulk of the spectrum proposed to be auctioned, will remain unsold at the exorbitant base price accepted by TC,” said Prashant Singhal, global telecom leader at consultancy EY India.

As per budget estimates, the government expects to rake in Rs 50,000 crore, as 25% upfront payment from spectrum buyers this year, which suggests it is looking at close to Rs 2 lakh crore gross auction proceeds.

“At best, there could be very selective bidding for 700 MHz spectrum in the cheapest C-category circles to test the waters” Singhal said. This, according to him, is since capex efficiency of 700 MHz does not justify current pricing, which has been recommended by the Telecom Regulatory Authority of India (Trai).

“If one uses Rs 14,365-crore suggested base price of a 5 MHz pan-India block of 1800 MHz spectrum as benchmark, then 700 MHz airwaves are overpriced by nearly 40%,” said Singhal, citing a study by London based GSM Association on comparative capex efficiencies of data bands.

The government expects a revenue of Rs 98,995 crore from communication services in 2016-17, which includes proceeds from spectrum auction and other fees levied by DoT. Success of the next auction rests largely on sale of 700 MHz band since it accounts for more than a third of the 2,142 MHz spectrum proposed to be sold, and nearly three-fourths of the Rs 5.4 lakh crore the government could generate if all spectrum on offer is sold at base price.

Analysts also ruled out aggressive bidding for 4G airwaves in 800 MHz band — the second most expensive band — on grounds of present device ecosystem challenges, and the fact that over 80% of India’s mobile telmarket does not use this spectrum.

But EY India’s Singhal expects only about 40-50% of the total 2,142 MHz of spectrum to get sold. Analysts said bulk of the purchases could happen in 1800 MHz, 2100 MHz and 2300 MHz bands, where the government could see some premium coming in, as incumbent carriers may try to plug gaps in their 3G footprint and also spruce up 4G airwave holdings in the more affordable bands like 1800 MHz and 2300 MHz before Reliance Jio Infocomm launches commercial services.

Rajan Mathews, director-general of GSM industry body Cellular Operators Association of India, said, “the tougher payment structure formulated by TC would further increase financial burden on a sector reeling under Rs 3,50,000 crore debt and automatically reduce bidding appetite,” adding, “Revenue maximisation to meet budget estimates appears to be the sole objective as the government may have sensed there will be few takers for sub-1 GHz bands like 700 MHz at the approved base price.”

But terms for winners of sub-1 GHz bands—700 MHz, 800 MHz and 900 MHz — remain the same, that is 25% upfront with the rest paid in similar terms as other bands.

“The new payment terms are cash flow-unfriendly, so why would telcos, who are already up to their eyeballs in debt, pay through their noses in a spectrum surplus scenario, where there are no business continuity challenges, unlike the past two auctions,” said Hemant Joshi, a partner at Deloitte Haskins & Sells.

In a sector encumbered with a whopping $53 billion of debt, Joshi does not expect any irrational bidding for expensive 700 MHz or 800 MHz spectrum to happen. Incumbent carriers, he said, are unlikely "to squander their family jewels on untested 4G bandwidth" amid device ecosystem challenges in a fiercely competitive data market.

Idea Cellular managing director Himanshu Kapania had recently told ET that India has entered a surplus spectrum era since the quantum of airwaves to be released in the next auction will give every telecom operator a chance to buy purely on a need basis at floor prices.

However, not everyone feels the upcoming auction will fail. Industry veteran, BK Syngal, exchairman of erstwhile VSNL (now, Tata Communications) said, “Serious bidding is bound to happen as every incumbent will try to maximize data spectrum holdings before Jio launches, to be able to grab and hold on to high-end data consumers who increasingly want higher and uninterrupted data speeds.”

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